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Financial Transactions

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Sales and Trade

While Islam recognises private ownership, profit motive and market forces, it has put certain

divine restrictions on financial transactions and economic activities. The prohibition of usury or interest, gambling, dealing in unlawful goods or services, short sales and speculative transactions are some examples of these divine restrictions. All these prohibitions combined have a cumulative effect of maintaining balance, distributive justice, and equality of opportunities.

Usury or Interest

One financial restriction, laid out by God in very strong terms, is the forbidding of usury (ribā).

“Those who consume interest will stand ˹on Judgment Day˺ like those driven to madness by Satan’s touch. That is because they say, “Trade is no different than interest.” But Allah has permitted trading and forbidden interest. Whoever refrains—after having received warning from their Lord—may keep their previous gains, and their case is left to Allah. As for those who persist, it is they who will be the residents of the Fire. They will be there forever.”
Quran (2:275)

Usury is defined as a contract for the trade of certain types of commodities in which the quantity of either or both of the traded items are not known to be the same, or with a delay in payment of the price or transfer of the purchased item.

Types of wealth that can be considered usurious are Money, Gold, Silver, and Food Stuffs.

For example, if a person were to loan you one hundred dollars and demand that you repay him or her one hundred and ten dollars (i.e., charging ten percent interest), that would constitute usury. Such transactions can lead to the wealthy unjustly exploiting the poor, leading to a further disproportionate distribution of wealth. To engage in usury, as either the recipient or the payer of the increase, is explicitly forbidden (ḥarām). Loans in Islam are seen as a form of charity rewarded by God. Alternative financing models in which a co-operative or bank finances larger purchases through co-ownership and the like are commonplace in Muslim societies. One of the most important characteristics of Islamic financing is that it is asset-backed financing. Islam does not recognize money as a subject-matter of trade, except in some special cases. Money has no intrinsic utility: it is only a medium of exchange. Each unit of money is 100% equal to another unit of the same denomination, therefore, there is no room for making profit through the exchange of these units. Profit is generated when something having intrinsic utility is sold for money or when different currencies are exchanged, one for another. The profit earned through dealing in money (of the same currency) or the papers representing them is interest, hence prohibited. Therefore, unlike conventional financial institutions, financing in Islam is always based on illiquid assets which creates real assets and inventories.